Учебный год 22-23 / Interpretation of Contracts
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46 Interpretation of contracts
lapse of 10 minutes after the contractual completion time. This was only decided after looking at context: a volatile property market where certainty was crucial. In this case Lord Ho mann said, ‘in many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced’.51 He was therefore unwilling to allow equity to intervene and give relief against forfeiture of deposit. As Collins notes, sometimes ‘the context tells the judge not to look at the context’.52
Not all judges are sensitive to the realisation that plain meaning (in context) still has an important role. By way of contrast, consider Lord Clyde in BCCI v Ali. He said:
On the face of it, if one were to take a strict or literal approach, the words of the agreement seem to include every claim of any kind, whether then identifiable or not, which Mr Naeem might have in any capacity against the bank at any time, then or in the future. But such a comprehensive disclaimer would in my view be a remarkable thing for him to be giving . . .53
One can, of course, make a particular interpretation immediately unpalatable by giving it the pejorative label of ‘literal’. But it is surely going too far here to say that disentitling Mr Naeem to sue for stigma damages is being unduly legalistic, or is based upon a ‘technical interpretation’ or shows too much regard for the ‘niceties of language’.54 Lord Clyde suggests that the literal approach dictates an all or nothing conclusion – literalism requires reading the clause as widely as it can possibly be read. It is then of course much easier to denounce such an interpretation as giving rise to wholly unreasonable results concerning the extent of the release. The mistake here is to assume that once one has adopted a literal approach then literalism must operate unchecked, rendering context completely irrelevant. Lord Clyde suggests that a ‘literal’ reading would imply that the release seeks to exclude liability for all claims of whatever
51[1997] 2 All ER 215, 218.
52Collins, ‘Committed Contextualism’, p 193.
53At [80].
54Per Lord Steyn, Mannai Investments v Eagle Star Life Assurance [1997] 3 All ER 352, 372.
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nature.55 Since that cannot have been the intention of the parties, the literal meaning is rejected, and the majority of the House of Lords substitutes its own ‘reasonable’ view based on policy factors concerning the fairness of the exchange and who should bear the risk of a change in the law.56 For Lord Ho mann the majority confused the question of what the term meant with the question of whether, in the light of their conduct, BCCI should be able to rely on the term. Of course for Lord Ho mann, once the relevant context has been identified as the ‘employment relationship’, and not artificially inflated to include all possible claims that Mr Naeem might make against the bank, it was plausible that the term meant what it said. Within that context, nonexistent claims were included within the scope of the release. The wholesale rejection of the ‘literal’ approach in favour of contextualism may therefore lead the courts into error, albeit an understandable one. Judges must therefore be careful not to allow contextualism to become ‘another name for construing the contract until one arrives at the result one wants’.57
The intentions of the par ties
Prior to Lord Ho mann’s statement, the courts seemed agreed that the point of contract interpretation was to uncover the objective intentions of the parties. In Pioneer Shipping Ltd v BTP Tioxide Ltd, for example, Lord Diplock said, ‘the object sought to be achieved in construing any contract is to ascertain what the mutual intentions of the parties were as to the legal obligations each assumed by the contractual words in which they sought to express them.’58 Many contract law instruments and codes also make this claim about the primacy of intention, although reference to the ‘common’ intention of the parties is preferred. Both the UNIDROIT Principles for International Commercial Contracts and the Principles of European Contract Law assert that a contract should be interpreted according
55The Commercial Court recently resisted an attempt to undermine the operation of an exclusion clause by the same tactic of reading it too literally: Mitsubishi Corp v Eastwind Transport Ltd [2004] EWHC 2924 at [33].
56Lord Nicholls was perhaps more open about the policy implications of the case, at [35]. See also Brownsword, R., ‘After Investors: Interpretation, Expectation and the Implicit Dimension of the “New Contextualism” ’ in Implicit Dimensions, 122.
57Brownsword, R., Contract Law: Themes for the Twenty-First Century, p 162.
58[1982] AC 724, quoted in Lewison, The Interpretation of Contracts, p 19.
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to the common intention of the parties.59 However, in relation to the place of intention in interpretation, a doubt emerges, since Lord Ho mann does not mention the intentions of the parties in his Investors statement. Collins has noted this60 and contrasts it with the position of other judges who accord primacy to the parties’ intentions.61 Of course it could be that finding the ‘intentions of the parties’ in a commercial contract is synonymous with discovering the commercial purpose of the agreement, or adopting an interpretation that accords with ‘business common sense’, since most commercial contracting parties will intend (objectively and subjectively) that their agreement is e ective to achieve some purpose. Thus Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen said, ‘when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.’62
One reason for the omission may be that Lord Ho mann was trying to avoid the standard rhetorical statements on interpretation that are easy to make, but o er no real insight into the interpretative process. This would be di cult to reconcile with some of his earlier pronouncements on interpretation though. In the earlier Mannai decision he said, ‘commercial contracts are construed in light of all the background which could reasonably be expected to have been available to the parties in order to ascertain what would objectively have been understood to be their intention’.63 Why then, does intention not figure in his Investors speech, delivered only one month after the Mannai judgment? It could be that he does not refer to the intentions of the parties because he regards the search for them as a largely fictitious exercise. The ‘real’ point of interpretation is to discover what the contract would mean to a reasonable person. The lack of reference to intention might also be a manifestation of the realisation that such intentions are di cult to discern, and may not actually exist within the documents themselves. Recall that Lord Ho mann has written, extrajudicially, that the subject matter of the contractual interpretation process is often the utterances of ‘imaginary’ people.64
59At Arts 4.1 and 5.101, respectively.
60Collins, ‘Committed Contextualism’, p 198.
61Op. cit., Staughton, Sir C., p 304.
62[1976] 3 All ER 570, p 574.
63Mannai Investments, p 380.
64‘Intolerable Wrestle’, p 661.
Contract interpretation and the rise of contextualism 49
Nevertheless, whether imaginary or not, for some interpretation theorists, this lack of primacy accorded to the intentions of the parties would be quite surprising.65
Lord Ho mann should not be taken to be suggesting that intention is of no relevance. Rather the change is one of emphasis: objectivity – the meaning conveyed to a reasonable person – is more important than the parties’ intentions. One reason to omit reference to intention is to avoid any possible confusion between adopting a contextual approach to interpretation and admitting evidence of the subjective intentions of the parties. Can contextualism be regarded as involving the claim that subjective intentions matter? If one concentrates on judicial pronouncements, then the answer is clearly no – as far as intention is relevant, it is objective intention that is the key. But it may be di cult to discern the di erence between a subjective approach and a heavily contextualised objective approach.66 Consider this statement of the court’s interpretative task by Lord Steyn in Sirius International Insurance v FAI:
The aim of the inquiry is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language. The inquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual scene.67
Although referring to the ‘reasonable person’, this person is situated as the parties were, and must be assumed to know at least some of the things that the parties know. This is in reality an uneasy alliance between objective and subjective approaches. Evidently the personal idiosyncrasies and motives of the parties are not a feature to be taken into account, but beyond that, it is not clear what precisely is included and excluded by the reference to a ‘reasonable person, circumstanced as the actual parties were’. Indeed the di culties of
65 Kramer, ‘Implication in Fact’, p 385; Fish, ‘There is No Textualist Position’, pp 632–3; Raz, J., ‘Intention in Interpretation’ in R.P. George (ed.) The Autonomy of Law, 1996, Oxford: OUP, p 256.
66Greenawalt, ‘Pluralist’, pp 576–7.
67At [18].
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drawing these fine distinctions is one reason why there are calls to abandon the rule excluding evidence of prior negotiations in interpreting contracts. This is discussed further in Chapter 3. Given the possibility of confusion between context and subjective intent, it is perhaps wise of Lord Ho mann to avoid reference to intention altogether. He notes that, as far as communication is concerned, subjective intent cannot be the vantage point of interpretation, since we have ‘no window into [the speaker’s] mind’.68 As well as avoiding confusion with subjectivity, the reference to a ‘reasonable person’, rather than the parties’ intentions, has another advantage.
One tends to regard the objective approach to contracts as being wholly exclusive. Under an objective approach, evidence of the individual subjective intentions of each of the contracting parties, their previous negotiations and so on, will be excluded. Evidence of personal motives is likewise irrelevant. But what is often overlooked is that the objective approach has an inclusive aspect that is unconnected to the intentions of the parties, except in so far as it is attributed to them as ‘reasonable contractors’ in the same factual situation. In Investors, Lord Ho mann stated that the background must be material that is ‘reasonably available’ to the parties, but it does not actually have to be known by them. The objective approach can add in to the interpretative process information of which the contracting parties were unaware, but which would be available to their reasonable counterparts. For example, in Prenn v Simmonds the interpretative question related to the word ‘profits’. Did it refer to the profits of a holding company only, or did it include the profits of the entire group – the holding company and its subsidiaries? Reference only to the word in the document admitted of either interpretation. While one relevant context for making the decision was the purpose of the transaction, Lord Wilberforce also accepted that it reflected ‘accepted business practice’ and ‘accounting practice’ that ‘profits’ referred to the consolidated accounts for the whole group of companies, not the individual accounts for the di erent enterprises in the group. This material would be relevant to context whether the parties were actually aware it constituted ‘accepted business practice’ or not, provided the reasonable contractor operating under the same factual situation would be aware of it. Lord Ho mann then, omits to refer to the parties’ intentions not because they are unimportant, but
68 ‘Intolerable Wrestle’, p 661.
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because the objective knowledge of the reasonable contractor is more important. Lord Ho mann does not wish to be taken to be asserting that there is only one consideration in interpretation, whether parties’ intentions or anything else. This does raise the issue of what kind of information is reasonably available to the parties in terms of business practice and, in particular, what kind of legal knowledge should be attributed to them. This connects to the important issue of choice of the relevant context within which an agreement should be placed.
What is the background or context?
Although dubbed ‘contextual interpretation’, Lord Ho mann does not refer to ‘context’ explicitly in his restatement. Rather, he refers to ‘background knowledge’, which includes ‘absolutely anything [regarded by the reasonable man as relevant]’. While interpretation is of the contractual documents, and may in large part be dictated by the documents, it is not limited to the contractual documents. It cannot be denied that all communication, and contracting behaviour, takes place in a context. As Lord Wilberforce remarked in Reardon Smith Line, ‘No contracts are made in a vacuum: there is always a setting in which they have to be placed’.69 A court rarely, if ever, confines itself solely to consideration of the contractual documents in resolving contract disputes. At the very least the immediate history of the transaction will be placed before the judge, and the judge may hear evidence from the parties themselves. These parties may have had little or no influence over the wording of the contractual documents. In this respect context is impossible to avoid. But much depends here upon how context is understood. One judge’s understanding of context will not necessarily coincide with another judge’s understanding.70 One judge may restrict ‘context’ to largely legal matters, or the basic facts of the dispute, and another judge may take a more expansive approach. Indeed, while the temptation may be to understand context as all those matters not related to the documents or the law, Lord Ho mann in BCCI v Ali said that background was not confined to the factual background, but could include ‘the state
69[1976] 3 All ER 570, p 574.
70See the comments of the Court of Appeal in Emcor Drake & Scull Ltd v Sir Robert McAlpine Ltd [2004] EWCA Civ 1733 at [6], criticising the first instance judge for the range of evidence he considered.
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of the law’.71 Some of the di culties that arise over choice of context are discussed in the next chapter.
In one sense, Lord Ho mann is simply articulating the process we all go through when we interpret the communications of others. Lord Ho mann is suggesting we should abandon technical ‘rules’ of legal interpretation and interpret contracts the way all of us (as reasonable communicators and users of language – not necessarily legal or contractual language) interpret communicative texts and utterances. The shift in interpretative method is more motivated by a desire to bring contractual interpretation into line with the ‘everyday’ interpretative method used to understand all instances of communication, whether written or oral. Kramer has pointed out that Lord Ho mann’s remarks are based on modern developments in the philosophy of language and the realisation that all meaning and understanding relies on context to some extent.72 Contextual interpretation is still directed to the words used, but is undertaken by using information that any user of language would have available to them in working out what the contract means. Hence there is no ‘conceptual limit’ to what can be taken as background (although the law might limit the available evidence largely for pragmatic reasons).73 This is reinforced when one considers Lord Ho mann’s remark in
Jumbo King Ltd v Faithful Properties Ltd that ‘the overriding objective in construction is to give e ect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean
. . . if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.’74 Understood in this way, the shift to contextual interpretation is not radical in the slightest – it simply demands that contractual interpretation should be undertaken in the same way as any other ‘everyday’ interpretative exercise.
This assimilation with everyday communication is brought out in relation to the interpretation of ‘linguistic’ mistakes in the documents. One of the e ects of the change in emphasis in interpretation is that contracting parties now need not rely on an action for rectification to
71At para [39].
72Kramer, A., ‘Common Sense Principles of Contractual Interpretation (and how we’ve been using them all along)’ (2003) 23 OJLS 173, 177–82. See, also, McMeel, G., ‘Language and the Law Revisited: An Intellectual History of Contractual Interpretation’ (2005) 34 Common Law World Review 256.
73Lord Ho mann, BCCI v Ali, at [39].
74[1999] 4 HKC 707 at 727.
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amend mistakes (a court order to amend a contract that contains a defect in recording the agreement, the unrectified contract being contrary to what both parties objectively agreed), the process of contextual interpretation can, in some instances, do it for them.75 In everyday communication we correct linguistic mistakes all the time and many of these errors will not prevent understanding the meaning of the message that is being conveyed. However, this ‘rectifying’ aspect of interpretation may run counter to the observance of strict formalities required by many legal documents, and may result in a failure to enforce the contractual scheme that was agreed between the parties. In Mannai Investments v Eagle Star Life Assurance,76 the tenant of rented property wanted to terminate the lease because market rents had fallen in the area. Under the term of the lease agreement between the parties, the tenant could validly terminate provided his notice to terminate expired on the third anniversary of the lease commencement date. The lease began on 13 January 1992. To validly terminate the lease, the tenant would have to give notice that expired on 13 January 1995. The tenant made a mistake and gave notice to terminate the lease expiring on 12 January 1995. The landlord claimed the notice was invalid because it didn’t comply with the terms of the lease agreement. The Court of Appeal gave judgment for the landlord, but the House of Lords by a 3:2 majority held the notice to terminate was valid. One party may make a mistake in the contractual language, but provided a reasonable person would understand the message they were attempting to convey, the communication will have its intended e ect. Crucially, as a matter of ‘everyday interpretation’, a reasonable landlord would have understood what the tenant was trying to do. In Mannai, attention to the background, context or factual situation of the agreement, utilised through the mechanism of interpretation, turned a formally ine ective document into an e ective one. The legal context – including consideration of what would formally constitute a valid notice under the terms of the parties’ agreement – was not a paramount consideration for the majority. The case was treated as one concerning interpretation, rather than form. This issue will be considered further in Chapter 4.
75McMeel, ‘Interpretation and Mistake in Contract Law’, pp 54–5. See, also, Lord Millett, The Starsin, at [192].
76[1997] 3 All ER 352.
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The shift to contextual interpretation ‘in context’
What can motivate the desire to assimilate contractual interpretation with the principles of ‘everyday’ interpretation? Why allow that the formalism suggested by the agreed legal scheme in Mannai can be overridden when the social and factual context communicates the tenant’s purposes to the landlord su ciently well? It was earlier noted that one possibility is that Lord Ho mann is simply taking on board insights developed in the philosophy of language about the importance of context to interpreting everyday communications. On this view there is no such thing as plain meaning divorced from context. Another possibility is that Lord Ho mann’s restatement (and its precursors) is motivated by the recognition that it is the social context that underpins much contractual behaviour, rather than the formal language of the documents. While courts generally regard contextual material as relevant only to the extent that it provides some answer to the question of what the parties meant by the particular words they used in the documents, there is a much wider significance to the general movement towards contextualism.
Accessing the ‘real’ agreement
Contextual interpretation o ers up the possibility for expanding the range of information available to the judge in resolving the dispute. As we have seen, this expansion would be in accordance with much current contracts scholarship that calls for a greater appreciation on the part of courts of the ‘social context’ of contracting behaviour. This element of the contextualist critique impinges on contract doctrine (the rules as announced and applied by courts) in di erent ways, but if Collins is correct when he identifies that ‘the perennial issue is whether the written document exhausts the obligations of the parties, or whether the recorded agreement is supplemented and qualified by implicit undertakings’,77 then there is a much wider scope for the operation of context than just assisting the judge in
77 Collins, H., ‘The Research Agenda of Implicit Dimensions of Contracts’ in Implicit Dimensions at 3. See, also, Posner, E., ‘The Parol Evidence Rule, the Plain Meaning Rule and the Principles of Contractual Interpretation’ (1998) 146 U Pennsylvania L R 533 at 534.
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the interpretation of terms in the documents. For the supporters of contextualism, it is argued that the law should recognise that it is simply one form of support system (among others) for contracts; it is not constitutive of them. As a support system, contract law should focus more on the real agreement that the parties have made, not the reduction of that agreement to the written form favoured by lawyers.78 This ‘real agreement’ may be generated by fairly elusive criteria, such as the norms and motivations that arise from trade customs, the previous contracting history between the parties and the market in which the parties operate. This version of contextualism demands more flexibility than the rigid doctrinal structure, and a more individualised approach to the parties’ dispute. Collins puts the point well:
If the courts wish to do justice between the parties rather than referee the quality of the lawyers in devising comprehensive risk allocation, they should not attach such weight to the paperwork but concentrate their energies on an investigation of the context, the market conventions, and the assumptions of the parties in framing the core deal.79
The recognition of the whole social dimension to contracts and contracting behaviour is well established in the US literature on contracts, and the contextual approach is enshrined in US contracts law. Articles 1–103(a), 1–303 and 2–202(a) of the Uniform Commercial Code point to the importance of commercial practice, specifically course of performance, course of dealing, or usage of trade, in contractual interpretation. The contextual approach is also supported in the US by empirical studies that demonstrate how businesses make little use of written contracts and contract law in their dealings.80 There is similar, although less extensive, empirical evidence in the UK of the non-importance of contract law to businesses.81 This work has led one commentator to remark
78For example, Macaulay, S., ‘Real Deal’ in Implicit Dimensions, at 51.
79Collins, Regulating Contracts, p 165.
80For example, Macaulay, S., ‘ “Non-contractual Relations in Business: A Preliminary Study”, (1963) 28 American Sociological Review 55; L. Bernstein, “Private Commercial Law in the Cotton Industry: Creating Co-operation Through Rules, Norms and Institutions” (2001) 99 Michigan L R 1724.’
81Beale, H. and Dugdale, T., ‘Contracts Between Businessmen: Planning and the Use of Contractual Remedies’ (1975) 2 Br J Law and Soc 45.